Chill Brands Regulatory News (CHLL)

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF EU REGULATION 596/2014 (WHICH FORMS PART OF DOMESTIC UK LAW PURSUANT TO THE EUROPEAN UNION (WITHDRAWAL) ACT 2018), AS AMENDED BY REGULATION 11 OF THE MARKET ABUSE (AMENDMENT) (EU EXIT) REGULATIONS 2019/310.

28 July 2023

Chill Brands Group plc

("Chill Brands" or the "Company")

Final Results for the year to 31 March 2023Update on US Vapour Pilot SchemeUpdate on Ox Agreement and US Warehousing

Final Results for the year to 31 March 2023

Chill Brands, the consumer packaged-goods distribution company, announces its final results and the publication of its audited annual report and accounts for the year to 31 March 2023 (the 'Annual Report').

The Annual Report will be published today on the Company's website in compliance with its articles of association and the electronic communications provisions of the Companies Act 2006.

Please click on the link below for a full text version of the Chill Brands Group plc audited annual report and accounts for the year to 31 March 2021:

http://www.rns-pdf.londonstockexchange.com/rns/5948H_1-2023-7-28.pdf

Key elements from the Annual Report can also be viewed below.

The Annual Report will be laid before shareholders at this year's Annual General Meeting, which is expected to take place in early September. Further information regarding the AGM will be announced shortly.

Update on US Pilot Scheme of Vapour Products

Since receiving its first shipment of nicotine-free vapour products earlier this year, the Company has been working on the strategic expansion of a pilot store program in key US markets. Pilot stores are now operational in Florida, Arizona and Colorado, with the upcoming launch of select pilot locations in Texas expected during August 2023.

Initial results from the pilot stores have been encouraging, with consistently positive feedback received from retailers and customers. Stores participating in the pilot scheme have demonstrated a healthy sell-through rate that validates the quality of Chill ZER0 vapour products and consumer appetite for them.

The Company will continue to systematically expand its own distribution of vapour products while using the valuable data gathered from pilot stores to support discussions with large retail groups. The Company aims to proliferate the supply of its nicotine-free vapour products in pilot states before conducting a wider rollout. Chill Brands will continue to sell the products direct to consumers throughout the US via the Chill.com website.

Further updates regarding the UK launch of Chill Brands' nicotine free vapour products will be provided in due course as local partners commence retail sales, event and marketing activations.

Update on Ox Agreement

The Company is pleased to report that Ox Distributing LLC ("Ox") has paid the remaining balance of its debt to the Company in settlement of the agreement made during the financial year ending 31 March 2022.

Ox previously acted as the Company's master distributor. This agreement constituted a related party transaction as Ox is owned and operated by members of the Schrader family, including the Company's Non-Executive Director Eric Schrader, who collectively have a significant shareholding in Chill Brands. In the 2022 financial year, Ox placed a large order for Chill CBD products in line with forecasts for the activation of sales to new convenience store locations. Logistical delays led to the late delivery of these products to Ox, while challenges relating to the Company's retail distribution model limited store activations.

As a result of these issues, the Group entered into an extended credit term agreement with Ox to provide them with an adequate opportunity to sell the delayed products downstream to retailers and customers, generating funds with which to settle the outstanding liability to Chill. As described in the Company's Half-Year Report for the period to 30 September 2022, the original value of the debt was reduced by deductions relating to product that was not delivered to Ox during 2021. The note was further reduced in line with promotional offers and free product fills provided to retailers as part of the Group's retail distribution strategy. Ox repaid a total of US $589,029.54 over the course of the agreement. The value of this sale was recorded as revenue in the prior financial year ending 31 March 2022. Subsequent sales of this inventory to retailers and end consumers could not therefore be recognised again during the financial year ending 31 March 2023. Chill Brands ended Ox's master distributor status in May 2022.

Update on US Warehousing

The Company has been informed that Fabric, a provider of warehousing and fulfilment services, has undergone a strategic pivot and will no longer operate its own micro-fulfilment facilities. The Company originally contracted to use Fabric's US micro-fulfilment services in February 2022.

This change will have no impact on Chill Brands' ongoing operations as alternative US warehousing and fulfilment solutions have already been arranged and implemented. Following a thorough search process, the Company has contracted with its significant shareholders, the Schrader family (operating under their business entity Racquette Hanger LLC, "Racquette") for the use of their warehousing and fulfilment facilities in Fort Collins, Colorado. For the avoidance of doubt, the agreement with Racquette relates solely to provision of warehousing services and does not grant any distributor status.

In making this decision, Chill Brands' Board of Directors (excluding Eric Schrader) consulted external advisors and considered the requirements of the business and the need to avoid conflicts of interest. The warehousing and fulfilment services provided by Racquette are offered at rates below the market average and are more affordable than those quoted by comparable service providers. This new arrangement will also provide greater flexibility to Chill Brands, facilitating the onboarding and fulfilment of certain products listed for sale on the Chill.com marketplace while limiting costs.

-ENDS-

About Chill Brands Group

Chill Brands Group plc (LSE: CHLL, OTCQB: CHBRF) is focused on the development, marketing and distribution of wellness and recreational products containing natural, functional ingredients. The Company's proprietary product range is distributed by some of the most recognisable convenience retail outlets in the US and includes nicotine-free disposable vapour products that cater to the rapidly growing market for tobacco alternatives. Chill Brands also operates the chill.com e-commerce website, on which it is building a marketplace of products from third-party brands.

Publication on website

A copy of this announcement is also available on the Group's website at http://www.chillbrandsgroup.com

Media enquiries:

CHIEF EXECUTIVE'S REVIEW AND STRATEGIC REPORT

Introduction

I am pleased to present the Group's results for the financial year ended 31 March 2023 ("FY23" or the "Period").

During the Period there has been a material shift in our business strategy, driven by the need to adapt to survive in an ever-evolving market. As a result of factors that I will go on to explain, the market for CBD consumer products has become extremely challenging. With the best interests of the Group and its shareholders in mind, we have therefore redirected our efforts and resources towards several diversified business activities including the sale of nicotine-free vapour products and the development of an e-commerce marketplace on the Chill.com website. We believe that these activities hold great promise and have the potential to significantly enhance the Group's commercial prospects.

Over the past year our revenue has fallen short of expectations, and this is naturally disappointing. It is important to note, however, that our financial statements are reflective of a year of transition during which historical sales arrangements limited recordable revenue. They do not demonstrate Chill's growth potential in the rapidly expanding market for e-cigarette style vapour products, (where sales only commenced at the very end of the period covered) nor do they reflect the decisive action we have taken to control costs and improve operational efficiency.

While it is important to review the Group's financial performance during the Period, I strongly encourage you to fully consider Chill Brands' status today along with our plans for the future. Through continued progress across a diversified base of business, myself and the Board wholeheartedly believe that the Group is on course to move beyond its difficult past and grow to a position of stability and, in due course, profitability.

This report aims to provide you with greater insight into our decisions, the challenges faced by the business, and the steps we are taking to position Chill Brands for success.

Adapting to Changing Market Conditions

The history of Chill Brands is characterised by near-continuous evolution, from the Group's oil and gas origins as Highlands Natural Resources to its expansion into cannabidiol as Zoetic International. This evolution continued during the Period as changes to the Group's management structure prompted a thorough evaluation of its business model. 

Following a thorough assessment of the Group's business activities, it became evident that the performance of its CBD products did not support the continuation of its strategy. It was also apparent that the Group's operations had become too costly when considered against sales results, as is often the case with early-stage consumer goods businesses. In response to these challenges, we took proactive measures to reduce overheads and streamline operations. We initiated a comprehensive cost optimisation program that focused on enhancing operational efficiency, reducing reliance on external providers and advisers, and reallocating resources to areas with higher growth potential. This exercise resulted in significant costs savings, the benefits of which will largely bear fruit during the financial year ending 31 March 2024.

The CBD Landscape

In addition to issues specific to the Group itself, it was also evident that wider macro problems existed, and continue to exist, within the market for cannabidiol (CBD) products. It became clear to the management team that a strategic shift was essential to secure the viability of the business.

While CBD products gained initial popularity following the liberalisation of cannabinoid policy in the US and UK during 2018, the regulatory landscape and market dynamics have changed dramatically, impacting the ability of CBD businesses to scale and achieve profitability. Regulatory uncertainty has limited market access, hindered distribution channels, and created barriers to growth for businesses operating in this industry. Enforcement by bodies such as the U.S. Food and Drug Administration (FDA) have restricted the ability of CBD businesses to communicate the utility of their products to customers, limiting their marketing potential and dampening consumer uptake.

The market for CBD products is volatile and, in many cases, retailers have been unable to justify their continued inclusion on shelves due to inconsistent sales performances. The proliferation of CBD products has also led to fluctuating prices and squeezed profit margins for businesses that are already confronted with higher costs than those concerned with the sale of more typical consumer products that face a lower regulatory burden. These difficulties are not unique to the Group and have become evident across the industry with even the most established brands reporting declining sales. This further emphasised the need for a decisive reaction from the Group.

Crucially, the market for cannabinoid products has itself undergone an exceptional degree of change since the Group first launched its wares during 2019. Due to the factors outlined in this report, many CBD businesses have failed to generate sufficient sales to justify their costs. This has led to level of financial instability as evidenced by the poor performance, and in some cases closure, of peers including certain UK listed companies. In the United States, initial consumer appetite for non-intoxicating CBD products has declined in favour of products that provide a more potent effect. Products containing psychoactive cannabinoids like Delta-9-tetrahydrocannabinol ("Delta 9") have rapidly gained popularity and provide a natural range swap for retailers whose appetite for CBD products has been diminished by reduced consumer demand.

Although Chill Brands' management team believes that CBD products have a positive future ahead of them, we must concede that the landscape is extremely challenging. The operation of UK law currently precludes the Group from directly participating in the recreational psychoactive cannabinoid market even in territories where it is legal, and while we are exploring options that may enable us to progress in this area, there can be no guarantee that any such option will reach fruition.

In light of these circumstances, we have taken steps to identify alternative business avenues that offer the significant growth potential that our shareholders deserve. The Group will continue to service existing demand for its CBD products suite, while exploring value accretive partnerships with successful CBD brands that may be seeking new distribution channels. We believe that demand for CBD products will increase organically over time as market consolidation takes effect, but we must maintain focus on activities and categories that are most likely to create value in the near term. We have therefore made the decision to shift our core business focus toward the sale of nicotine-free vapour products and the development of a marketplace on the Chill.com website.

The Opportunity in Vapour

Our decision to enter the vapour industry was driven by several factors but it is important not to lose sight of the bigger picture. It has been forecasted that the market for vapour products could be worth more than USD $168 billion by 2030, with a compound annual growth rate of almost 30 percent during the intervening period. Behind the numbers there has been a considerable surge in demand for disposable products driven by changing consumer preferences and increasing acceptance of vaping as an alternative to traditional tobacco products. There can be no doubt that the future of this industry is bright and the potential return on an investment by Chill Brands will be amplified if we can gain even a small percentage share of the vapour products market.

For Chill Brands there is a natural fit between the vapour category and the Group's existing experience in the tobacco alternatives space. While still challenging, the regulatory landscape for vapour products provides greater certainty and therefore a more favourable environment for growth than has been the case for CBD products. By redirecting our efforts towards this category, we are capitalizing on a rapidly expanding market that has gained immense popularity among a diverse range of consumers, offering a broader customer base and greater revenue opportunities.

We have further considered how the Group could gain a strong competitive advantage in the vapour category. Following the discontinuation of the Group's synthetic nicotine oral pouch range in August 2022, the Board is acutely aware of the difficulties surrounding the regulatory approval of nicotine products in the US. Compliance will always remain a high priority for the business, and we have elected to sell products that are not currently subject to nicotine licensing or approval requirements in order to avoid increasing the regulatory burden incumbent on the Group. At the time of writing, Chill Brands' vapour products are not subject to FDA deeming rules (which determine whether a product is regulated as 'tobacco') in the United States, and given their lack of nicotine content are not subject to many of the rules and restrictions contained within The Tobacco and Related Products Regulations in the UK.

Our nicotine-free vapour products (marketed as 'Chill Zero' devices) are intended to appeal to a wider customer base of adult consumers. Not all users of vapour products wish to consume nicotine and there is growing demand for alternatives. Some customers will be nearing the end of their smoking cessation journey and seeking a product that will satisfy their habitual fixation while finally eliminating their intake of nicotine. Others may simply want the sensory experience of vaping in recreational settings without introducing the highly addictive compound into their daily lives. 

We have already taken strides towards making a success of our newly launched nicotine-free vapour products and anticipate that sales of this range will rapidly become the Group's primary source of revenue. When combined with the magnetism of our brand, we expect these products to gain traction in the market through multiple points of distribution in the UK, US and beyond.

In the US our dedicated sales agents have been actively introducing our vapour products to a wide range of potential stockists and we look forward to sharing further updates on sales to retail stores and distributors in the near future. The feedback we have received both from early adopters and market research has been overwhelmingly positive, reinforcing our belief in the potential success of our products. Few competitors have adjusted their focus to nicotine-free devices and there remains a niche available for us to occupy as a leading brand within this category.

As announced in May 2023, the Company has also entered into an agreement with The Vaping Group to act as its sales and distribution agent in the UK. We continue to draw on the expansive network and extensive industry expertise of our new partners with whom we are executing a comprehensive go-to-market strategy that is intended to result in sales of Chill Zero vapour products to large retailers, category-specific chains, and independent outlets across the country. From these foundations we expect further growth into the burgeoning European and Middle Eastern markets.

There is, of course, still much work to be done in order to capture the future potential of our vapour products range. We will need to monitor regulatory developments carefully, working closely with our manufacturing partners to ensure that our products are safe and of the highest possible quality. It will also be necessary for us to adopt an even stronger position with regard to social and environmental responsibility. It is imperative that the Group takes measures to restrict the sale of its products to adult consumers while limiting its impact on the environment through sustainable manufacturing and schemes relating to the recycling of vapour products. These issues will continue to demand attention from the Group, and it will be important for us to allocate resources to solving them.

With that being said, we are confident that this strategic shift will make an extremely positive contribution to our revenue trajectory, delivering long-term value to our shareholders. Even a fraction of the sales volumes achieved by category leaders would be transformational for Chill Brands and there is substantial upside for the Group if new distribution channels can be effectively unlocked.

A Marketplace on Chill.com

Beyond ambitions for our new range of nicotine-free vapour products, we have also developed a revised business plan relating to the use of the Chill.com domain. Following its acquisition in 2021 (completed during the Period as announced on 23 June 2022), the website was used only for online sales of the Group's branded products including CBD-infused oral chew pouches and herbal smokes. During the extensive review of the Group's operations described elsewhere in this report, it was determined that online sales of its own products did not do justice to the marketing potential of the Chill.com domain. This led us to explore alternative routes to fully commercialise this digital asset and ultimately to the onboarding of third-party brands and their products to the site.

Through consistent efforts we are steadily building a marketplace that is dedicated to natural products containing hemp derivatives, nootropics, and other functional ingredients. There are numerous advantages for brands joining the marketplace, including exposure to a growing number of monthly visitors, a diverse consumer base that will continue to expand as additional brands list on the site, and cross-brand marketing opportunities through social media, extensive email lists and other means. Given the Group's dual US/UK footprint there is also an opportunity for brands from either territory to make an initial entrance to a new geographic market simply by listing on the Chill.com site. The experience is designed to be as pain-free as possible for businesses, with the Group taking a commission from sales and not overly limiting the upside potential for brands as is the case with certain other marketplace platforms.

It is hard to fully quantify the opportunity ahead if we can build the Chill.com platform effectively. Successful marketplace websites create a network effect, where the value of the platform increases with the number of participants. As more sellers and buyers join the marketplace, additional customers are attracted, leading to a continuous cycle of growth. The resultant brand community will be populated with customer reviews, blogs and other materials that will build credibility and enhance the overall user experience.

If nothing else the performance of the Group's legacy CBD products has shown that consumer markets are cyclical in nature. Trends come and go, yet by building a marketplace site the Group can quickly adapt to changing market conditions by expanding into new product categories without adopting the financial risk of product development costs or inventory obsolescence. We intend for this diversified revenue stream to help mitigate the risk of relying solely on Chill branded product sales and in future it may provide a degree of stability during periods of volatility in the retail sales market.

To succeed in this venture, it will be necessary for us to make progress in relation to search engine optimisation, user experience and other areas that will enhance the effectiveness of the site. A complete visual refresh of the Chill.com website has already rectified the apparent disconnect between our previous brand identity, product offering and the preferences of relevant consumer demographics. Now we must take steps to increase traffic to the site, as our ability to attract higher levels of customer traffic will become one of the primary factors determining our success.

Growth of the Chill.com marketplace remains a long-term endeavour for us, but it is one that has vast potential if scale can be achieved. I look forward to providing further updates on our work as the site expands both in terms of its user base and the breadth of brands and products available listed for sale.

Looking Ahead

The 2023 financial year marked a critical juncture for Chill Brands. Having started 2022 as a distressed contender within the extremely challenging CBD market, the business now has a renewed opportunity in the fast-growing market for vapour products. Our change of focus is one that we strongly believe will improve our financial performance and create significant value for our shareholders.

The Group is once again at an early stage of its development in a new area. It is crucial to recognise that there are many factors that can influence the performance of a newly launched product and so it is important to manage expectations. Generating substantial revenue from these new products may take time, but there is cause for optimism from the steps we have already taken to secure their success. We continue to build our distribution channels and enhance our marketing strategies to maximise potential sales, and there is no apparent reason why our Chill.com marketplace and Chill Zero vapour products cannot in turn capture a sizeable portion of their respective markets.

We will continue to keep you informed about our progress and performance as we invest in the promotion, distribution and refinement of our platform and products. While it may take time to gain traction, it is worth remembering that the most successful product launches are characterised by gradual market penetration and a steady increase in consumer adoption. We are not merely chasing trends and are focused on sustainable growth that requires a patient and calculated approach.

On behalf of the entire management team, I extend my sincere gratitude to our shareholders for your continued patience, support, and enthusiasm. We are incredibly grateful to have the opportunity to build this company and look forward to delivering value as we complete this operational pivot and continue Chill Brands' journey of growth.

CHIEF EXECUTIVE'S FINANCIAL REVIEW

During the Period the Group executed a managed pivot from its previous activities to a more diverse base of business including the online distribution of third-party brands and the development and sale of nicotine-free vapour products. The focus of the Group's management team during this time has been on exiting historical contracts, eliminating costs, and reallocating resources from non-performing business activities.

The Group recorded a loss for the year of £4,287,891 (2022: £5,711,503), a reduction of 25% that can largely be attributed to the removal of significant costs for marketing sponsorships and consultancy agreements. The recorded loss is inclusive of non-cash costs for the year of £1,304,570 (2022: £1,958,076) reflecting share expenses for options granted during this and previous periods and imputed interest on convertible loan notes. The remainder of the loss is a result of the Group's continued costs of operation, listing, and the servicing of business activities and products that had not gained sufficient traction in the consumer market to yield a profit. 

On 26 April 2022 the Group announced that it had conditionally raised £3,500,000 (before costs) from new and existing investors through fundraising consisting of two parts. The first part was by means of Subscription for 29,166,699 new ordinary shares of 1 pence each at a price of 2 pence each. The second part comprised convertible loan notes of 2 pence each with an aggregate value of £2,916,670 which will convert automatically on the publication of a prospectus or the passing of legislation that means a prospectus is no longer required. Shareholder approval was sought and gained at a General Meeting held on 12 May 2022, where all resolutions were duly passed.

Further to the aforementioned fundraising, the Group announced its intention to issue an Open Offer to enable long-term shareholders to participate on equivalent terms. As announced on 17 June 2022, the Open Offer raised a total of £212,201 (before expenses).

In June 2022 the Company completed its purchase of the Chill.com website domain, making a balancing payment of $800,000. Further commentary relating to the financial treatment of the Chill.com domain can be found in Note 2 to the Financial Statements accompanying to this report.

During the 2022 financial period the Group launched a new range of synthetic nicotine products under the commercial name 'Tobacco Free Nicotine' or 'TFN'. As discussed elsewhere in this report, the US Congress legislated during March 2022 to regulate all forms of nicotine in the same way as tobacco. As a result of this regulatory change, manufacturers and markets of synthetic nicotine products must now submit a premarket tobacco application (PMTA) in order for their products to remain on sale in the US. While the Group submitted initial PMTA documentation in respect of its TFN products, the cost of pursuing the application through to completion was considered prohibitively expensive given that the product range was new and therefore lacked established distribution channels. The Group subsequently discontinued the TFN range and the remaining value of the TFN inventory has been discounted.

The Company's commercial activities during the reporting period consisted of ongoing sales of its legacy CBD products and the development of new business areas including nicotine free vapour products and the sales of products from third-party brands on the Chill.com website. A redesigned and refreshed Chill.com website was launched in October 2022, while sales of the first third-party products commenced in February 2023 with the addition of Mad Tasty hemp-infused sparkling water products. Numerous other brands have now joined the site both in the UK and the US.

On 16 March 2023 the Company announced that it had raised £560,000 (before expenses) from a financial institution. The fundraise consisted of a subscription for 16,000,000 new ordinary shares of 1 pence each at a price of 3.5 pence per share.

On 3 April 2023 the Company announced that it had raised £2.6 million (before expenses) from a high net worth investor. This consisted of a subscription for 25,000,000 new ordinary shares of 1 pence each at a price of 4 pence per share for a total of £1,000,000,000, and the issue of convertible unsecured loan notes with a value of £1.6 million. The Convertible Loan Notes carry a coupon of 12% per annum for a term of three years from the date of issue on 31 March 2023, and are convertible into ordinary shares at 8 pence per share.

The Company received its first nicotine-free vapour products in late March 2023 and no sales of these products were recorded during the reporting period. Since the end of the reporting period the Company has worked with pilot stores in Arizona, Colorado and Florida to gather sales data and establish a market fit for the nicotine-free vapour products. The Company continues to expand its roll out and distribution of nicotine-free vapour products to distributors and retailers in the US.

On 18 May 2023, the Company announced that it had entered into an agreement with The Vaping Group for the marketing and distribution of its nicotine-free vapour products in the UK. The Company's nicotine-free vapour products, marketed as 'Chill Zero', will become available for purchase by UK customers, distributors and retailers during Summer 2023. The UK distribution of Chill Zero nicotine-free vapour products is expected to make a significant contribution to the Company's revenues during the financial year ending 31 March 2024.

Revenue

During the Period the Company recorded revenues of £82,840 (2022: £624,187 - of which £447,814 was generated by a single sale event to Ox Distributing LLC as described below). Actual sales of its branded products to retailers and consumers exceeded this level, however recordable revenues were limited by circumstances relating to the ownership of these products. The Company sold a large portion of its CBD product inventory to its former master distributor and connected party, Ox Distributing LLC ("Ox"), during the year ending 31 March 2022. Extended payment terms agreed in relation to that sale provided the Company with cashflow during the Period in review as products sold through, however additional revenues could not be recognised for sales of products that had already been recorded as sold to Ox..

Going forward, the Board of Directors is confident that the Company will be able to improve revenues, primarily through the sale of its newly launched nicotine-free vapour products which are wholly owned by the Company.

Expenditure

During the period the Company took targeted steps to reduce expenditure, in particular those costs related to marketing activities and professional advisory fees. Notably, the Company incurred substantial legal costs during the prior financial year, a large portion of which was not settled until the start of the 2023 financial year. The Company negotiated with its former legal advisors, reducing the amount payable by more than £100,000. Numerous financial, legal and corporate consultancy agreements were also terminated during the 2023 financial year as contractual arrangements permitted.

During the year the Company incurred a one-off expense of $800,000 in respect of the final payment for the acquisition of the Chill.com web domain. Further one-off costs related to legal advisory services in connection with the Company's range of synthetic nicotine products that were discontinued in August 2022. Additional legal costs were incurred in relation to an employment and intellectual property dispute with a former senior employee. That dispute has now been settled amicably and has not materially affected the Company's financial position or ongoing operations.

Overall, expenditure decreased as compared to the prior financial year. The Company has reduced costs associated with its staff and directors, while reducing its exposure to marketing costs through the termination of legacy sponsorship, advertising, and consulting contracts.

In addition to cash costs, the Group also incurred costs relating to share-based awards including those from prior periods that have been amortised and recorded over an extended period of time. Going forward, the Company will incur additional costs in relation to establishing sales and distribution channels for its range of nicotine-free vapour products. This, along with ongoing costs relating to the Company's listing on the London Stock Exchange, represent a significant portion of its ongoing costs base.

Liquidity, Cash and Cash Equivalents

At the year end, the Group held £3,767,426 at the bank (2022: £420,045).

Funding and Going Concern

During the Period the Group was sustained by fundraising activity that raised a total of £3,500,000 before costs through a combination of subscription shares at 2 pence per share and through convertible loan notes of 2 pence each with an aggregate value of £2,916,670 which will convert automatically on the publication of a prospectus by 31 May 2024 or the passing of legislation that means a prospectus is no longer required. The loan note aspect of the fundraising activity was made necessary by the Group's compliance with the FCA listing rules which limited the Board's ability to issue subscription shares to that value. Further funds were raised from an Open Offer to the Group's long-term shareholders totalling £212,201 before costs. This fundraising was approved at a General Meeting of the Company's shareholders held in May 2022.

In March 2023 the Group raised £560,000 (before costs) from the issue of 16,000,000 new ordinary shares of 1 pence each at a price of 3.5 pence per share. This was followed by further fundraising activity as the Group raised £2,600,000 from a high-net-worth investor. This fundraise consisted of a subscription for 25,000,000 new ordinary shares of 1 pence each at a price of 4 pence per share, and the issue of convertible unsecured loan notes on 31 March 2023 with a value of £1.6 million, convertible into ordinary shares at 8 pence per share.

The Directors note that the Company's external independent auditors have recognised an uncertainty as to going concern in their report. This relates to the operation of convertible loan notes with an aggregate value of £2,916,670 issued to investors as part of the Company's fundraising activities in April and May 2022 (the "2022 Loan Notes"). The 2022 Loan Notes are set to automatically and compulsorily convert into ordinary shares upon the publication of a prospectus that has been approved by the UK Financial Conduct Authority. The loan notes will terminate and their principal value, along with any accrued interest, will become payable if the prospectus has not been approved by the FCA by 31 May 2024. It is this potential requirement to repay the 2022 Loan Notes that is the subject of the reported uncertainty as to going concern. This is because, in such circumstances, the Company may need to seek additional investment capital in order to settle the outstanding balance of the loan notes while continuing to operate its business.

The Company continues work to complete the preparation of a prospectus, with a number of drafts having been exchanged with the FCA. At the time of writing it is the expectation of the Directors, having consulted the Company's professional advisors, that the prospectus will likely be approved by the FCA in the near future and that the 2022 Loan Notes will therefore convert in advance of their termination date. Provided that the prospectus is approved and published in advance of the termination date on 31 May 2024, the principal value of the 2022 Loan Notes will not be repayable in cash and the Company will be absolved of the uncertainty as to going concern, subject to no other changes.

Noting the above, and given gross fundraising of £3.16 million since the start of 2023, the cost cutting efforts described in this report, and the continued focus of the Company's management on cash management, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Further details are given in Note 2.2 to the Financial Statements and in the Directors' Report. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements.

CHIEF EXECUTIVE'S REVIEW AND STRATEGIC REPORT - OTHER MATTERS

Board Changes and Operational Composition

On 19 April 2022, the Group announced a reorganisation of its executive management team with my appointment to the Board of Directors in the capacity of Chief Executive Officer. In line with this change, the former Co-Chief Executive Officers have adopted alternative roles within the business. Antonio Russo now acts as the Group's Chief Commercial Officer with responsibility for the Group's sales and marketing activities. Trevor Taylor now acts as the Group's Chief Operating Officer with primary responsibility for reducing costs, sourcing, and distribution.

Feminised Hemp Seed Program

The Company also carries a significant inventory of feminised hemp seeds. The seeds are of a variety that, upon cultivation, yield plant matter with a high CBD content and low levels of THC. This characteristic is of paramount importance and holds significant value due to the legal and market considerations surrounding hemp cultivation. The high CBD and low THC profile ensures compliance with EU regulations, as hemp crops must contain THC levels below the legal threshold to be classified as industrial hemp.

The seeds are undergoing extensive testing with a view to securing entry into the European seed catalogue. Once included on this list, the seeds would become saleable to licensed cultivators in the European Union. During the latest testing cycle the Company's cultivation and testing partners observed anomalies relating to the colour of the plant matter and the presence of off types within the cultivation area. Further testing will be required to determine the source and prevalence of these anomalies.

The anomalies observed during the latest testing cycle are not expected to have any impact on the commercial potential of the feminised hemp seeds outside of the EU. These observations are specific to the testing and regulatory requirements within the EU, and they do not affect the viability or marketability of the seeds in other regions.

Going forward, the Company will gather additional data to determine the most appropriate course of action in relation to its inventory of feminised hemp seeds. This may include conducting further test cycles, offering the seeds for sale outside of the European Union, or seeking a buyer interested in continuing the development of hemp seed genetics with the varieties owned by the Company.

During the 2023 financial year, the Directors proactively explored the potential application of the Company's feminised hemp seeds for phytoremediation purposes. The involves the cultivation of hemp plants to mitigate environmental pollution and restore site contaminated by mining and other industrial activities. The Directors will continue to evaluate the potential benefits, market demand and regulatory landscape for this application of the hemp seeds and will determine whether further development of this business area will be viable.

UK Novel Foods Authorisation

In order to sell ingestible CBD products in the UK, the Company has progressed through the novel foods application process by submitting relevant applications to the Food Standards Agency (FSA). Novel Foods are defined as food items were not widely consumed in the European Union before May 1997.

The Company's Zoetic tinctures and Chill gummies have now been added to an updated FSA list of CBD food products that are linked to a credible application for authorisation. Products that have reached the validation stage undergo risk assessments and further examination by the FSA to determine their safety profile and suitability for sale in the UK market. The FSA has provided that the products can remain on sale during this stage of the Novel Foods application process.

The Company and its manufacturing partners have taken all necessary steps to comply with the requirements imposed by the FCA. Recent reports suggest the FSA may not complete the process required to provide full Novel Foods authorisation to CBD products until at least 2024. The Company will provide further updates regarding the status of its ingestible CBD products as the Novel Foods application process progresses.

Discontinuation of Synthetic Nicotine Products

In late 2021 the Company launched a new range of 'Tobacco Free Nicotine' ("TFN") pouches containing synthetic nicotine. In March 2022, a Federal funding bill that amended the statutory definition of "tobacco product" was passed by the US Congress, giving the US Food and Drug Administration ("FDA") authority over synthetic nicotine products. The FDA ruled that companies selling synthetic nicotine products should submit Premarket Tobacco Applications ("PMTA") in order to remain on sale. While the Company filed the necessary application, the ongoing costs of completing a PMTA were considered prohibitive to the continuation of the Chill TFN product range. As announced on 3 August 2022, the Company has discontinued the development of synthetic nicotine products and the value of the remaining inventory has been written off.

Zoetic

The Group continues to operate the Zoetic brand of CBD-infused topical creams, beauty products and ingestible tinctures in the UK. While certain products (notably the CBD tinctures) have gained a core base of repeat customers, the skincare range has not achieved the same level of success. After much consideration, we have made the decision to retire non-performing products and focus our resources and energy on those products that perform well enough to justify ongoing production and investment. This will better enable us to allocate resources towards areas and activities that offer a clearer path to value creation.

Going forward, Zoetic tinctures and a select number of other products will remain on sale both via the brand's website and on the Chill.com marketplace.

Prospectus

The Company is currently in the process of preparing a prospectus which, upon approval and publication, would lead to the issuance of 154,675,220 additional ordinary shares and up to 19,750,574 warrants for ordinary shares. This detailed prospectus has been carefully prepared with the assistance of the Company's advisors and several drafts have been exchanged between the Company and the UK Financial Conduct Authority (FCA). Further information regarding the progress of the prospectus will be provided when appropriate.

GOING CONCERN

The financial statements have been prepared on a going concern basis which assumes that the Group will continue in operational existence for the foreseeable future.

The Directors note that the Company's external independent auditors have recognised a material uncertainty as to going concern in their report. This relates to the operation of convertible loan notes with an aggregate value of £2,916,670 issued to investors as part of the Company's fundraising activities in April and May 2022 (the "2022 Loan Notes"). The 2022 Loan Notes are set to automatically and compulsorily convert into ordinary shares upon the publication of a prospectus that has been approved by the UK Financial Conduct Authority. The loan notes will terminate and their principal value, along with any accrued interest, will become payable if the prospectus has not been approved by the FCA by 31 May 2024. It is this potential requirement to repay the 2022 Loan Notes that is the subject of the reported uncertainty as to going concern. This is because, in such circumstances, the Company may need to seek additional investment capital in order to settle the outstanding balance of the loan notes while continuing to operate its business.

The Company continues work to complete the preparation of a prospectus, with a number of drafts having been exchanged with the FCA. At the time of writing it is the expectation of the Directors, having consulted the Company's professional advisors, that the prospectus will likely be approved by the FCA in the near future and that the 2022 Loan Notes will therefore convert in advance of their termination date. Provided that the prospectus is approved and published in advance of the termination date on 31 May 2024, the principal value of the 2022 Loan Notes will not be repayable and the Company will be absolved of the uncertainty as to going concern.

Noting the above, and given gross fundraising of £3.16 million during calendar year 2023, the cost cutting efforts described in this report, and the continued focus of the Company's management on cash management, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Further details are given in Note 2.2 to the Financial Statements and in the Directors' Report. For this reason, the Directors continue to adopt the going concern basis in preparing the financial statements. The auditors refer to going concern by way of a material uncertainty within their audit report.

EXTRACT FROM INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF CHILL BRANDS PLC

Opinion

We have audited the financial statements of Chill Brands Plc (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 March 2023 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Parent Company Statements of Financial Position, the Consolidated and Parent Company Statements of Changes in Equity, the Consolidated and Parent Company Statements of Cashflows and notes to the financial statements, including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and UK-adopted International Accounting Standards and as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

In our opinion:

· the financial statements give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 March 2023 and of the Group's loss for the year then ended;

· the Group financial statements have been properly prepared in accordance with UK-adopted International Accounting Standards;

· the Parent Company financial statements have been properly prepared in accordance with UK-adopted International Accounting Standards and as applied in accordance with the provisions of the Companies Act 2006; and

· the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the Group and Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty related to going concern

We draw attention to note 2.2 in the financial statements, which indicates that the going concern status of the Group is dependent on the successful publication of the Parent Company's prospectus and subsequent compulsory conversion of certain Convertible Loan Notes ("CLNs").

The Group issued CLNs on 13 May 2022 and 21 June 2022 with an aggregate value of £2,916,670 and £176,835 respectively (as disclosed in note 24). These CLNs have a termination date of 31 May 2024, which falls into the period under review with respect to the going concern assessment. The Directors have considered the terms and conditions of these CLNs, and note that they both contain a settlement option whereby they automatically convert into newly issued ordinary shares, on the publication of a prospectus or the passing of future legislation that means a prospectus is no longer required. The Directors consider the successful publication of the prospectus to be a likely event, which will occur prior to the termination date of the CLNs. We note that if the prospectus is not successfully published prior to the termination date, the principal amount of the CLNs becomes payable in cash.

As stated in note 2.2, these events or conditions, indicate that a material uncertainty exists that may cast significant doubt on the Group's and Parent Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

In auditing the financial statements, we have concluded that the Director's use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the Directors' assessment of the Group's and Parent Company's ability to continue to adopt the going concern basis of accounting included:

· reviewing the terms and conditions of the CLNs;

· assessing and challenging key underlying assumptions used by the entity's management in the going concern model for reasonableness; and

· reviewing management accounts for portions of the going concern period to ascertain the forecasting accuracy of management and performing sensitivity analysis to stress test the going concern model.

Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of this report.